Problem 20-04A a-c

At the beginning of last year (2019), Richter Condos installed a mechanized elevator for its tenants. The owner of the company, Ron Richter, recently returned from an industry equipment exhibition where he watched a computerized elevator demonstrated. He was impressed with the elevator's speed, comfort of ride, and cost efficiency. Upon returning from the exhibition, he asked his purchasing agent to collect price and operating cost data on the new elevator. In addition, he asked the companys accountant to provide him with cost data on the companys elevator. This information is presented below.

		Old Elevator			New Elevator
Purchase price		$98,500			$161,000
Estimated salvage value		0			0
Estimated useful life		5 years			4 years
Depreciation method		Straight-line			Straight-line
Annual operating costs
other than depreciation:
Variable		$35,000			$11,000
Fixed		22,800			9,000

Annual revenues are $240,000, and selling and administrative expenses are $29,000, regardless of which elevator is used. If the old elevator is replaced now, at the beginning of 2020, Richter Condos will be able to sell it for $25,700.

Determine any gain or loss if the old elevator is replaced.

Loss on saleGain on sale

$

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Prepare a 4-year summarized income statement for each of the following assumptions: (1) The old elevator is retained.

				Retain Old Elevator
Revenues				$
Less costs:
Variable costs		$
Fixed costs
Selling & administrative
Depreciation
Net income				$

(2) The old elevator is replaced.

				Replace Old Elevator
Revenues				$
Less costs:
Variable costs		$
Fixed costs
Selling & administrative
Depreciation
Operating income
Loss on old elevator
Net income				$

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Using incremental analysis, determine if the old elevator should be replaced. (In the first two columns, enter costs and expenses as positive amounts, and any amounts received as negative amounts. In the third column, enter net income increases as positive amounts and decreases as negative amounts. Enter negative amounts using either a negative sign preceding the number e.g. -15 or parentheses e.g. (15).)

		Retain Old Elevator		Replace Old Elevator		Net Income Increase (Decrease)
Variable operating costs		$		$		$
Fixed operating costs
New elevator cost
Salvage on old elevator
Totals		$		$		$

The old elevator

shouldshould not

be replaced.

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